Economic Uncertainty and Impact of Governments’ Spending on Economic Growth: An Empirical Study of Emerging Market Economies*

Abstract

The COVID-19-led economic crisis has rekindled scholarly interest in the relationship between government spending and economic growth. Further, there is an emerging realm of empirical literature that focuses on the dynamics of this relationship during times of uncertainty. Against this backdrop, this study investigates the effect of government expenditure on economic growth during economic uncertainty and the role of economic confidence in the transmission mechanism of policy shocks utilizing a panel generalized method of moments (GMM) framework for 13 select emerging market economies (EMEs). The findings suggest that the beneficial impact of government spending during economic uncertainty is not significantly different from regular times; however, its effectiveness is enhanced during contractionary periods. Government spending, on the other hand, does not have a statistically significant effect during expansionary phases. Furthermore, unanticipated government spending boosts economic confidence, especially during contractionary phases. Governments in EMEs should implement countercyclical fiscal policies selectively to stimulate aggregate demand and facilitate economic recovery, prioritizing targeted spending in confidence-building initiatives and key sectors. Spending in high multiplier sectors during contractionary periods can boost economic activity and speed recovery, fostering stability and growth amidst uncertain economic conditions. JEL Classification E32, H30, H32